In 2010, however, AEP sought a different approach to compensating CRES providers. AEP proposed a plan that would allow it to collect $355 per megawatt-day, which the utility claimed was its actual cost to provide capacity to CRES providers. Providers and consumer advocates challenged whether the PUCO had authority to establish and approve a cost-based capacity charge – and also whether AEP’s proposed rate was reasonable.

In a decision authored by Justice Kennedy, the court upheld AEP’s cost-based capacity charge. Specifically, the Court found that OCC had failed to demonstrate that the commission erred when it approved (1) a cost-based capacity charge, (2) set the amount of the capacity charge, and (3) allowed for the deferral of capacity costs.

The court did find merit, however, in one argument that AEP had raised. The court agreed with AEP that the commission acted unlawfully when it failed to explain its decision regarding certain input data and assumptions that were used to calculate the capacity charge rate. Justice Kennedy wrote that the commission committed an error when it failed to specifically address any of AEP’s challenges to the inputs. The court then remanded this issue to the PUCO.

The Retail Stability Rider

In 2012, the commission issued an order that modified and approved AEP’s proposed three-year Electric Security Plan (ESP). As part of the ESP, the commission approved a mechanism called the Retail Stability Rider (RSR) that was to be used by AEP to recover the deferred capacity costs from the Capacity Case. The PUCO instructed AEP to file an application after the ESP ended that, if approved, would allow it to recover the remaining deferred capacity costs starting in June 2015 and continuing over the following 32 months.

The RSR also was approved as “nonbypassable,” meaning that it is paid for by customers who receive generation from AEP and also by those who buy generation service from a CRES provider.

However, Justice Kennedy found that the commission actually had allowed the utility to recover more than its real capacity costs through the non-deferred part of the RSR. Further, because of the method used by the commission to calculate the RSR, the court could not determine exactly how much of the revenue recovered through the non-deferred part of the RSR was allocable to CRES capacity revenues. The court remanded the issue for further consideration.

AEP’s Reaction

A little unexpectedly, AEP was copacetic with the court’s decision. “The full impact of these decisions will be determined after remand to the Public Utilities Commission of Ohio (PUCO), but the utility expects the net financial result will be minimal,” AEP Ohio said in a statement on April 21.

The utility noted that the Supreme Court decision rejecting a portion of AEP Ohio’s RSR requires the PUCO to decrease AEP Ohio’s capacity deferral balance. However, a separate decision also requires that the PUCO reconsider the energy credit used to reduce AEP Ohio’s capacity charges for that period.